From pv magazine 10/24
Pakistan is awash with solar panels. In August 2024, BloombergNEF revealed Pakistan had imported 13 GW of Chinese modules in the first six months of the year. One project developer told pv magazine that there is so much oversupply, modules are “lying on the road.” The country had around 3.5 GW of module demand in 2023, according to InfoLink analysts. So how did it become the third-biggest market for Chinese module exports in early 2024?
“In 2022, what happened was Pakistan’s central bank ran out of dollars,” said Muhammad Mujahid, executive director at Lahore-based PV distributor Innovo Corp. Heavily indebted Pakistan has run trade deficits for years and the situation peaked around two years before module imports skyrocketed.
“We were really low on FX [foreign exchange] reserves and the government had to put an unspoken ban on imports,” said Mujahid, explaining that only essential items such as urgent medicines and food could be imported. Distributors like Innovo couldn’t import solar modules for around nine months.
Solar as commodity
Some modules did enter the country despite import restrictions. Importing goods in Pakistan normally requires a letter of credit (LC), a type of assurance for foreign transactions issued by the importer’s bank. Issuing LCs was restricted during the foreign exchange crisis of 2022 but this created an opportunity for Pakistani businesses already generating US dollar income through exports.
“If it cost me $0.15 [per watt of panel generation capacity] to import directly from the OEM (original equipment manufacturer), people were selling for $0.30/W in the local market,” said Hussain Khan, head of commercial at Wateen Energy Solutions, the renewables arm of telecoms giant Wateen Telecom. “There was a massive 100% margin in the trading business. Everyone jumped in and started ordering lots of panels. A lot of companies that have exports, if they export rice for example, they would bring their dollars back from abroad. Suddenly you saw a large increase in the distribution business.”
Mujahid said a lack of solar expertise was no barrier. He added that the commoditization of panels meant that “you could import [modules] from grade-A manufacturers and just sell them in the market. It’s not a hard sell.”
The panel glut, however, obliterated those margins in 2024 and PV modules are being sold at a loss.
Despite this, Mujahid said he does not expect to see a rush of businesses leaving the market. “I think it would take another six months, or maybe a year of losses to exit because those guys have made significant money,” he said.
Corporate investment
A lot of that money has come from the commercial and industrial (C&I) segment, as multinational and local companies have been investing heavily in PV, according to local developers.
“Everyone who has access to capital has gone for solar,” said Khan.
Wateen Energy Solutions has installed 30 MW in an 18-month period and expects to install around 50 MW of solar in 2025. The company’s development portfolio ranges from a 100 kW array at Coca Cola Export Co. to most recently a 4.5 MW deployment for Master Group, one of Pakistan’s leading conglomerates.
Khan described PV as the “most straightforward investment” because arrays offer a return on investment (ROI) after 18 months to two years.
ROI is not only short because modules are cheap. There are generous net metering rates available to installations of up to 1 MW of generation capacity and with a three-phase grid connection, although the government is considering a reduced rate. Even if net metering tariffs do become less lucrative, solar will still be an attractive investment as Pakistan’s electricity costs have increased dramatically in a short space of time.
In its “State of the Industry” report for 2023, Pakistan’s National Electric Power Regulatory Authority (NEPRA) attributed an “unprecedented increase” in the cost of electricity to a range of factors. Those included currency devaluation, reduced electricity demand, high transmission and distribution losses, theft, varying demand patterns, litigation, and “poor governance in the overall electric power sector.”
Capacity payments – fixed “take or pay” amounts paid by utilities to generators, regardless of the volume of electricity generated – also contributed to bill rises, according to NEPRA.
The Institute for Energy Economics and Financial Analysis (IEEFA) says Pakistan is in the grip of an acute capacity payment crisis.
IEEFA reported Pakistan paid PKR 6 trillion ($21.5 billion) in capacity payments from 2019-20 to 2023-24, while energy revenue was just PKR 5 trillion. Capacity payments of PKR 2.1 trillion are forecast for the 2024-25 financial year, which ends on June 30.
Capacity payments comprise more than half of the power price set by Pakistan’s Central Power Purchasing Agency in June 2024, because the long-term power purchase agreements (PPAs) signed with independent power producers in Pakistan are dollar indexed. When the value of the rupee falls, the cost of capacity payments rises.
“We cannot get rid of these legacy contracts easily because these are legally binding with a lifetime of 25 to 30 years,” said IEEFA Energy Finance Specialist Haneea Isaad, co-author of the institute’s Pakistan net-metering report. “When Pakistan signed these contracts in the 1990s and early 2000s, the country faced a huge energy supply deficit. The government really had to offer a premium for these contracts, in the form of dollar indexation, because no foreign investor would come in otherwise. Sadly, our power sector hasn’t evolved much since then, and we’re still forced to offer similar incentives to attract investment.”
Wheeling and dealing
Companies that want to circumvent rising electricity costs in Pakistan can, of course, sign PPAs of their own. Solar company Shams Power was the first business to sign power-supply deals with C&I clients in Pakistan after getting the requisite licenses from the regulator, according to its chief executive, Omar M. Malik. The company owns and operates close to 40 MW of solar generation capacity on C&I sites in the country and sells electricity to customers at an agreed rate.
“The business model is that we do everything,” said Malik. “We finance the project, we construct it, we operate it, maintain it for 15 to 20 years, and sell [C&I customers] electricity at a discount to the grid [price]. In some cases, our customers are even getting a 70% discount.”
Shams Power’s grid-tied solar PPA portfolio includes a diverse range of projects, such as a 5 MW rooftop installation for German wholesaler Metro Cash & Carry, a 5.5 MW ground-mounted installation for Coca Cola, a 2.5 MW ground-mounted system for confectionery giant Mondelez, and 2.5 MW of rooftop solar at a Hyundai auto plant. Other projects include installations at a hospital and university, where cost savings are being used to fund scholarships, improve facilities and reduce healthcare costs, according to the developer. The company has grown aggressively, Malik said, although Pakistan’s economic woes have affected the PPA market, due to higher financing costs.
There could be new and significant opportunities for developers such as Shams Power on the horizon, however. Regulations are already in place to replace Pakistan’s single-buyer model with a competitive wholesale electricity market, although progress toward implementation has been slow. Despite this, there is a real chance that wheeling – paying to use the public grid to transfer power between separate electricity buyers and sellers – could soon be an option for solar investors.
“Wheeling regulations have been in place since 2015, with modifications implemented in 2022,” said Shams Power Chief Operating Officer Irteza Ubaid. “This means that, legally and technically, wheeling is a viable option for us. The only outstanding issue is the pricing structure that will be set by the distribution company or the grid. We are among the early applicants for wheeling and are confident that we are on the verge of securing approval. We anticipate this process to be completed within the next year or 18 months. Once approved, we are fully prepared to take advantage of this opportunity and implement our wheeling plans.”
Ubaid added that Shams Power has a potential pipeline for wheeling of 500 MW, with a client list that includes major multinationals from the fast-moving consumer goods sector such as Unilever, Pepsi, Nestle, and Coca Cola.
State handbrake
The Pakistani government is well aware that the private sector is keen to deploy solar capacity at pace for self consumption, but that risks exacerbating the capacity payments problem.
Syed Faizan Ali Shah is a national renewables and grid integration expert who co-wrote IEEFA’s Pakistan net-metering paper with Isaad. Faizan, who also sits on Prime Minister Shehbaz Sharif’s solarization committee, said opening the floodgates to unrestricted solar generation would disrupt Pakistan’s electricity market, as a rapid reduction in grid payments from the C&I sector could put further financial pressure on the centralized utilities. He added that more inclusion of distributed solar at C&I premises would limit the potential of Pakistan’s upcoming wholesale energy market.
“If we open up the market without capping [generation capacity], if it is let loose, all the industrial consumers will find a way to offset their energy demand by contracting [generation] in another area in the country where they can buy cheaper energy,” said Faizan. “If this happens, all the generation fleet that the government has procured will become idle, so then who will pay for those power plants? This is a major concern – it is against the market norms but the concern is there. You have to pay the centrally procured generating power plants one way or the other.”
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